Chico's: Cheaper All the Time

"Stupid Chico's!" (NYSE: CHS  ) .

That's what my Foolish colleague Seth Jayson used to exclaim a couple of years ago, when he'd glance at the retailer's stock price. You see, back then Chico's stock price always seemed to go up. Chico's was "stupid" because Seth just couldn't get what he believed would be a reasonable price. My, how times have changed over the last year or so; today one might exclaim, "Stupid Chico's!" but it would have a very different meaning.

Second-quarter earnings at Chico's fell 28% to $39 million, or $0.22 per share. Revenues increased 8.1% to $436 million (a single-digit increase sounds abysmal compared to Chico's usual quarterly sales growth), and same-store sales fell 5.6%. Both Chico's and White House/Black Market's comps dropped. Gross profit as a percentage of sales withered to 57.7% from 60.4% last year this time. Sales, general, and administrative costs ballooned by 20.7% to $194 million. Inventories burgeoned 13% year over year (a much higher rate than sales), and its cash decreased 17% to $287.1 million.

Chico's blamed a comps decrease at the time it was making strategic investments, but I can understand why some investors might become impatient. Chico's kind of lost the plot last year, and now positive signs from the last couple of quarters appear to be withering on the vine. Chico's also said the third quarter isn't looking promising either, with expected decreases in quarterly earnings and continued soft gross margin.

One can view the glass as half empty or half full. Chico's is investing strategically, spending money on things like merchandising talent, increasing store size, and marketing, among other things. It makes sense that eventually Chico's can generate a good return on these investments, as long as it hasn't managed to completely alienate its once-loyal customers with continued merchandising missteps over the last year.

Earlier this year, I theorized that maybe the days of deep discounting of Chico's share price were over, but I spoke way too soon. Now, not only does Chico's have its own turnaround to contend with, it's also going to have to realize that many consumers might ratchet back their spending, which may hurt this retail niche very much. 

Older boomers that Chico's and its rivals, Coldwater Creek (NYSE: CWTR  ) and Talbots (NYSE: TLB  ) , vie for can become awfully conservative spenders when times are tough. That's also why many investors might feel more comfortable eyeing hot teen retail stocks like Abercrombie & Fitch (NYSE: ANF  ) or American Eagle Outfitters (Nasdaq: AEO  ) -- kids just don't worry like mature consumers do. And when they do worry, it's not about bills or mortgages or credit card payments -- they worry whether they're wearing the right outfits this season.

Then again, Chico's stock isn't bad news for true value-minded investors. It has taken such a beating it's now trading at a mere 12 times forward earnings. Compare that not only to its historical price-to-earnings ratio but also to analysts' expectations that Chico's will grow earnings by 25% in the year ending January 2009 (and another 25% the following year). As long as Chico's doesn't flounder in its turnaround long term, as Gap (NYSE: GPS  ) has, the stock seems well worth serious consideration.

Catch up with Chico's:

American Eagle Outfitters and Gap are Motley Fool Stock Advisor recommendations. Gap has also been recommended by Motley Fool Inside Value. 

Alyce Lomax does not own shares of any of the companies mentioned.


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